What is the R&D tax credit? Simply put, the R&D tax credit is a federal tax credit that provides incentives for companies to invest in research and development. Note, that the credit only applies to these activities if they occur within the U.S. If your R&D is done outside of the country, it will not qualify. While the tax credit is not new, many operators are still unaware of its benefits, how to claim it, and the significant impact it can have on their company’s bottom line.
What expenses qualify for R&D tax credit? Understanding which business expenses actually qualify for the tax credit is crucial to maximizing its potential impact on your organization. The main categories of R&D tax credit qualified expenses include:
The expenses, which are officially referred to as QREs (qualified research expenses), must be directly linked to R&D. It's essential to have clear documentation of how the expenses are connected to the company's research activities.
Because a wide range of expenses can potentially qualify under the R&D umbrella, we recommend receiving counsel from R&D tax credit advisors, especially if your organization is heavily R&D-focused.
Here is a high-level overview of how the traditional calculation method works:
Calculating your organization’s R&D tax credit can be an overwhelming task, but it’s necessary to receive the highest tax credit possible. In most cases, organizations leverage R&D tax credit advisors for this task.